Analysing Financial Position 5.0 / 5 based on 1 rating ? Business StudiesFinanceA2/A-levelAQA Created by: Catnipkaye13Created on: 08-11-17 11:48 Define Balance Sheet The balance sheet is a snapshot, valid for one day only. It gives the net worth of the business, total assets against liabilities. 1 of 14 Define Income Statement An income statement is a summary of a 12 month trading period and gives details of revenues, costs and profits. 2 of 14 Define Cost of Sales AKA Variable Direct Costs Costs directly associated with the production of goods e.g. raw materials 3 of 14 Define Expenses AKA Fixed Indirect Costs Costs incurred that aren't directly associated with production of goods e.g. rents, salaries 4 of 14 Gross Profit Margin (GPM) Gross Profit/ Revenue x 100 % of revenue which is gross profit Improve this figure by better controlling cost of sales 5 of 14 Operating Profit Margin (OPM) Operating Profit/Revenue x 100 % of revenue which is operating profit Reduce fixed costs Increase gross profit by decreasing cost of sales which increases operating profit 6 of 14 ROCE Operating Profit/(Total Equity + Non-Current liabilities) x 100 The amount of money you earn back from an investment Increase profitability Reduce capital employed whilst maintaining return %. 7 of 14 Current Ratio Current Assets/Current Liabilites Ideal 1.5-2. Compares the difference between current assets and current liabilities Includes STOCK 8 of 14 Gearing Non Current Liabilities/(Total Equity + Non-Current Liabilities) x 100 Shows how much debt the business has To improve this figure, pay off any existing debts ASAP. 9 of 14 Payable Days Payables/Cost of Sales x 365 Shows how long it takes to pay creditors Ask suppliers for longer credit terms 10 of 14 Receivable Days Receivables/Revenue x 365 Shows how long it takes for debtors to pay the business To improve this figure, reduce credit terms to debtors or increase revenue RECEIVABLE DAYS NEEDS TO BE LESS THAN PAYABLE DAYS! 11 of 14 Inventory Turnover Cost of Sales/Average Stock Held Shows how much capital is tied up in stock To improve this figure, sell off existing stocks and reduce product range 12 of 14 Why is ratio analysis valuable? Ratio analysis provides stakeholders with an insight into the performance of the business over a set period of time 13 of 14 What else is needed in ratio analysis? PREVIOUS YEARS DATA: To enable trend calculations. To see a steadily improving ROCE would reassure investors INDUSTRY DATA: Comparing like for like gives a more informed judgement of performance OTHER INDUSTRY DATA: Compare with alternative industries experiencing similar external influences e.g. rapid growth MARKET DATA: More context MARKET SHARE: Market leaders need to have stronger results HR DATA: Workforce shortages or problems- LT impact ECONOMIC ENVIRONMENT: Boom vs Recession. Are results in line with inflation? 14 of 14
3.7.2 Analysing the existing international position of a business to assess strengths and weaknesses: financial ratio analysis 0.0 / 5
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